Earlier this year, I came across an article from the Los Angeles Times. It’s about how millennials won’t be able to get mortgages on their own and will rely on their parents to co-sign on loans and mortgages in the future. More recently, I came across this article on CNN Money – it’s also about how the student loan debt is making home ownership out-of-reach for millennials.
While home ownership is not a goal for everyone, I strongly believe that financial independence should be a goal for everyone. Unfortunately, millennials are not there yet for a number of reasons, including: no financial literacy skills, dangerous amounts of student loan debt, and not establishing credit early enough. I think starting the conversation about financial literacy early is the best way to prepare young people for financial freedom, just as about educating teenage girls about the importance of personal finance.
I began to realize the importance of personal finance when I was a teenager. My parents did start the conversation about personal finance at an early age. But the only advice I got from them was to save every penny. They had done some investing in their small family business and they had invested in real estate.
But they did not understand the traditional investment avenues like stocks, bonds, or retirement accounts. On top of that, they were against having any credit cards because they didn’t understand the importance of a good credit history. They were definitely very conservative when it came to personal finance and didn’t offer much advice besides the importance of saving.
Fortunately, I had a teacher in high school who taught a small class about: how to avoid debt, how to build credit by managing credit cards strategically, how to invest, and the importance of responsible financial decisions. I took this course when I was about 15 years old, and it made quite an impression on me.
I implemented everything my teacher taught me and achieved the following:
- I got my first credit card while I was in high school – without a cosigner
- I began investing at the age of 20, regularly contributing (modest amounts!) to a retirement account
- I considered the costs of college and did everything I could to keep my student loan debt at a minimum. This enabled me to graduate from a top university will less than $10,000 in student loan debt.
- By the time I graduated college, I had a credit score of just over 700 and a credit limit of about $10,000 between two credit cards
- I continued to build good credit and by the time I was 25 I had achieved a 780+ credit score
- At age 24 I had been approved for a loan for graduate school – without a cosigner
- When I was 25 I had been pre-approved for a mortgage at an excellent rate – without a cosigner
These were the results of an early introduction to personal finance. I was able to achieve all of this – and it all started at age 15!
The Importance of Financial Independence
Of course, when I was a teenager I didn’t know that I was slowly working towards these benefits because teens don’t think about buying homes! Even millennials aren’t thinking about buying homes. And that’s fine, I’m not saying that the goal should be to buy a home.
But the ability to be pre-approved for a mortgage (without a cosigner) is a sign of financial independence, strength, security, and stability. These are the fundamental things that parents want for their children.
I recommend that parents begin teaching their kids about personal finance during the teen years for a few reasons:
- The sooner they learn it, the greater the impact will be
- By the time they leave the nest for college, they’ll be well informed and prepared to make important financial decisions on their own
- With student loan debt on the rise, knowing how debt works and how to minimize it is an invaluable skill for teens to master
Financial independence has many benefits for your child – and also for you! If you can educate your teen to become a financially responsible adult, you won’t have to worry about having to co-sign on any loans (car loans, student loans, mortgages, etc.), you can rest assured that you won’t need to risk your investments and retirement savings. Raising a financially savvy kid has benefits all around.
How can you start the conversation about personal finance with your teen?
Here’s a simple action step you can take TODAY to start the conversation about credit. The best part is that you don’t have to teach them everything all at once. Start small and be casual.
Next time you’re discussing school grades, you can get the conversation started by saying something like, and “Did you know I still get graded on stuff? The grade is called a FICO score and it measures how responsible I am with money. Pretty soon you’ll have a FICO score too – and you’ll get graded on your financial decisions too.”
That’s it! You’ve successfully gotten the idea of a credit score on their radar – in a way that they can relate to: by comparing it to grades in school. And you can leave it at that, you don’t even have to get into what FICO stands for, or what a credit bureau is.
The purpose of this very short, very casual conversation is to get this idea on their radar and to inspire curiosity.
They will naturally want to know more if you leave them with a little bit of mystery. It’s important to keep the conversation light and casual. As soon as your tone changes to an authoritative and demanding one, your teen will lose interest – or worse, they’ll do the opposite of what you suggest!
I was preapproved for a mortgage at a young age – but I decided not to buy. I’m confident that when I do want to buy a home, I will be able to do so – on my own. I love that I have the freedom to make that choice – and I think everyone can achieve that same level of freedom by starting early with the right financial literacy education.
About the Author: As a financial aid counselor, Katie has witnessed the lack of financial literacy among college students. That’s why she’s a big believer in learning money management skills early in life. Sign up for her newsletter where she shares tips about how to prepare your teen to make smart financial decisions: http://planningwithpoise.com/